What is Debt Consolidation?
Essentially, debt consolidation is taking out one loan to pay off multiple others, usually to secure a lower interest rate, secure a fixed interest rate, or for the convenience of only having to pay off one loan.
Consolidating your debt can be done in one of two ways.
Take out a consolidation loan
One of your options is to take out a consolidation loan from a bank. Search for a loan that will offer the lowest interest rate, and that loan can be used to pay off other debts.
There are two types of consolidation loans: unsecured and secured. Unsecured loans do not involve collateral against the loan and generally have a higher interest rate for less money than secured loans. Secured loans require collateral, such as a house, car or boat. If you take out a secured loan, you can lower your risk of defaulting. If you default, however, you may lose the collateral to the lender.
For example, if the asset used for collateral is the borrower’s home, a mortgage is secured against the house. In signing over this collateral, the asset owner agrees to allow the bank to foreclose on the house and pay off the loan should they default. In this situation, the risk to the lender is lower, which makes the interest rate offered to the borrower lower as well.
Hire a consolidation firm
You may feel lost trying to figure out how to consolidate your debt by yourself. If this is the case, you may want to consider hiring a professional company. A consolidation company in your state can give you some much needed debt consolidation help. Make sure you check the following important details before you decide on a company.
- The company should be accredited by the Better Business Bureau (BBB).
- Check for customer complaints against the company and search for written reviews online.
- Look at the company’s success stories.
- Get opinions from your friends and family. They may have more information or personal experiences to share.
When you decide on a company, talk to a customer service representative and they will evaluate your financial situation. They can provide the proper debt consolidation advice for your situation. Once you have chosen a consolidation program, the company will find you a loan to suit your needs, and then a debt attorney distributes the money to your creditors to pay off your other debts.
These programs were created to provide relief that will reduce your monthly payments, lower your interest rates, eliminate late fees, and spread the interest over a long period of time. This way, you can pay off your debts at your own pace. The companies will keep your creditors from harassing and threatening you during the process of consolidating your debt. Some companies will also help you make a monthly budget plan that will keep you from going back into debt.